Land Price Caution Warranted

The robust farm economy, particularly for crop producers, is having spillover effects through rural America, says Jason Henderson, vice president of the Federal Reserve Bank of Kansas City.

He reports that nonmetropolitan unemployment is running lower than that in metropolitan areas, and farmers are boosting local economies through purchases of everything from grain bins to office furniture. Combine sales are running at 10,000/month compared with the historical average of 6,000/month.

Farmers remain the driving force behind farmland purchases, he adds, still accounting for about 75% of deals. "Investors are bidding, but they generally are still looking for a capitalization rate of 4% – similar to 10-year Treasuries. Once prices get above that level, farmers are winning the purchases," he says.

"From Nebraska to northern Indiana, farmland prices are rising 25-40% year over year, and setting records in many locations," according to Henderson. "In the southern part of the Nebraska Sand Hills, some land is being tilled for the first time in many years and trees are being removed."

It is not surprising that farmers are buying more land given low interest rates and recent profits, says Brent Gloy, Purdue University agricultural economist.

"But there is substantial risk at this time, including interest rates, possible temptation to use leverage, and supply responses to higher priced production," he says. Gloy also notes that historically strong exports have been related with rising land prices – and when exports stop growing, land has typically stopped rising. "There is still room for higher land prices based on current fundamentals, but caution certainly is needed."